What is the Washington State DCP Plan?
The Deferred Compensation Plan, or DCP, is an optional retirement savings plan available to school district employees in Washington state. It allows them to save money above and beyond what they’re currently contributing to their state pension plans. The plan is flexible and has no open enrollment period, meaning employees can start or stop contributing at any time. Contributions are made on a pre-tax basis, meaning the employee gets a tax deduction when contributing, but will pay taxes on the money when they withdraw it in retirement.
Contributions and Withdrawals
The DCP plan allows employees to save up to $22,500 per year on a pre-tax basis if they’re under the age of 50, and up to $30,000 per year if they’re over the age of 50 as of 2023. Be sure to look up the current DCP limitations each year to continue to maximize its benefits. Contributions are invested in the same funds as those in Plan 3 Retirement Account, which includes seven individual mutual funds and a bunch of target date funds. The fees are considered average. They are higher than identical funds found at large institutions but lower than most mutual funds out there. There are no licensed advisors so you are 100% responsible for choosing and managing your investments
If you want to take the guesswork and stress out of managing your own investments then check out this unique DCP investment advice system. This is the only system tailored to Washington DCP that not only tells you what to buy and sell but when to do it. This system
Employees who separate from service can withdraw the money, and there is no 10% penalty for withdrawing before age 60. While this may not apply to most educators who retire after age 60, it is a unique feature that sets the DCP plan apart from other retirement savings plans. However, the plan does not allow loans, and accessing the money is limited until separation from service.
Potential Downsides
While the DCP plan offers tax benefits and the ability to save more for retirement, it also has some potential downsides. Up until October 1st of 2023, the plan only allows for pre-tax contributions, which can potentially lead to paying more in tax down the road. Additionally, the investment options are the same as those in the Plan 3 Retirement Account, which may not be ideal for those looking for diversification. It may be beneficial to consider other retirement savings plans, such as a Roth IRA or Roth 403(b), to ensure tax diversification and tax-free growth.
Conclusion
The DCP plan is a valuable option for school district employees in Washington state to save more for retirement. It offers flexibility, low fees, and unique features, such as penalty-free withdrawals before age 60. However, it is essential to consider the potential downsides, such as limited investment options and the lack of tax diversification. Employees should weigh the pros and cons and consider seeking professional financial advice to make the best decision for their retirement savings.
